Department of Agricultural and Resource Economics

Transcription

1 D 34 Department of Agricultural and Resource Economics BASIS ESTIMATES FOR FEEDER CATTLE AND FED CATTLE February 2018 Andrew P. Griffith, Assistant Professor Becky Bowling, UT Extension Specialist

2 Table of Contents Basis The Key to Successful Forward Pricing... 3 Why Basis is Important... 3 Feeder Cattle Basis... 6 Use of Basis in a Long Hedge... 6 Use of Basis in Forward Contracting... 9 Basis Tables Tennessee Feeder Cattle: Steers, lbs Tennessee Feeder Cattle: Steers, lbs Tennessee Feeder Cattle: Steers, lbs Tennessee Feeder Cattle: Steers, lbs Tennessee Feeder Cattle: Heifers, lbs Tennessee Feeder Cattle: Heifers, lbs Tennessee Feeder Cattle: Heifers, lbs Tennessee Feeder Cattle: Heifers, lbs Load Lot Basis for Steers and Heifers Basis Calculations Between Slaughter Cattle Futures and Specified Steer Cash Markets Average Basis Fed Steers - Live, Kansas Weekly Basis Calculations Between Slaughter Cattle Futures and Specified Heifer Cash Markets Average Basis Fed Heifers - Live, Kansas Weekly Data Sources USDA/Tennessee Department of Agriculture Market News Service Livestock Marketing Information Center Special Acknowledgement Publication based on original work by Dr. Emmit L. Rawls Professor Emeritus, Agricultural Economics

3 BASIS The Key to Successful Forward Pricing The term basis is used in different ways to define prices in relation to something else. It may be in relation to location or the futures price. In this discussion, basis is defined as the cash price minus the nearby futures price. If the feeder cattle futures price is $130 per hundred and the cash price for feeder cattle is $125 per hundred, the basis is -$5.00 ($125 minus $130 $ = -5.00). Other uses of the term basis need to be understood to avoid possible confusion. Contract basis is the fixed discount or premium that a buyer is willing to offer in setting the price for cattle to be delivered at a specific time in the future. Another use of the term might be to quote a price such as fed cattle are $130 per hundred basis Dodge City. This simply means the quoted price is for the Dodge City areas. It has nothing to do with forward pricing, futures or options. Why Basis Is Important The basis or historical difference in the cash and futures price should be used to adjust or localize the futures price. The historical data is usually available from the Extension Marketing Specialist. The most accurate basis information is that which can be recorded by beef producers when their cattle are sold. Simply note what the cash price is for the cattle and what the futures price is on the same day. If a producer has some record of prices received in the past, the state Extension Marketing Specialist can usually supply the futures prices for those dates. In hedging with a futures contract, the basis should be used to localize the futures price. This is accomplished by subtracting or adding the basis to or from the futures price. Similarly, the basis is subtracted from or added to the strike price of an option in order to know what floor or minimum selling price is being set by using the option. Once a futures position is taken in the market, the producer should follow the basis as the time of cattle sale approaches. Usually the cash and futures prices come together during the contract month, but it does not always happen. It is to the seller's advantage for the basis to become less negative or more positive at time of sale. This will allow the net price to be equal to or higher than projected, using the futures and basis estimate before initiating the hedge. 3

4 Example 1: Hedging 1 load (50,000 lbs) of 725 lbs steers in October for sale in March March feeder cattle futures $ Estimated basis (from page 18) Expected hedged price in March $ Date Cash Futures Basis October Expected hedged price in March $ Sell March futures $ $1.74 March Sell cattle $ Buy March futures $ $1.74 Net price on cattle Sell cattle $ Futures profit Net price $ Futures profit $ 5.00 Widening Basis Date Cash Futures Basis October Expected hedged price in March $ Sell March futures $ $1.74 March Sell cattle $ Buy March futures $ $4.74 Net price on cattle Sell cattle $ Futures profit Net price $ Futures profit $ 5.00 Narrowing Basis Date Cash Futures Basis October Expected hedged price in March $ Sell March futures $ $1.74 March Sell cattle $ Buy March futures $ $0.26 Net price on cattle Sell cattle $ Futures profit Net price $ Futures profit $

5 Example 2: Use of a Put Option in October to set a floor price on feeder steers that will be sold as a load in March, weighing 725 lbs Buy March Put Option $ Estimated basis (from page 18) Premium Expected hedged price in April $ Cattle Prices Increase Date Cash Option Basis October March Expected hedged price in March Sell cattle $ $ Buy March $130 Put Option $2.00 -$1.74 Put Option expires worthless (March Futures $140) -$1.74 Option loss $ 2.00 (cost of option) Net price on cattle Sell cattle $ Option loss Net price $ Cattle Prices Decrease Date Cash Futures Basis October Expected hedged price -$1.74 $ Buy March $130 $2.00 in March Sell March $130 -$1.74 March Sell cattle $ Put Option (March Futures $125.00) $5.00 Net price on cattle Sell cattle $ Option profit Net price $ Option profit $ 3.00 Use of basis to localize the option strike price provides a more accurate estimate of the floor price or protection. 5

6 Feeder Cattle Basis It is very important for producers of feeder cattle and calves to track their own basis data. The data contained in these tables are based on Medium and Large Frame No. 1 steer and heifer averages from Tennessee Auction Markets where 80 percent or more of the cattle sell as singles. Prices for uniform loads of 50,000 pounds may sell for $4 to $5 per cwt more than the average of auction cattle. Historical basis have been calculated for load lots of steers and heifers using price data from selected video and graded sale locations and are presented on page 18. Also, if the producer is selling or buying mixed No. 1 and No. 2 cattle, the basis needs to be adjusted to account for the lower cash prices for the lower grading cattle. The estimates in these tables are a starting point, but the beef producer s own data is more reliable. Some record of cash prices received or paid is needed, as well as the futures prices on the day of sale. These are available from UT Extension, Department of Agricultural and Resource Economics. Use of Basis in a Long Hedge A long hedge involves the use of an initial buying of a feeder cattle contract or call option to protect against higher feeder cattle prices. An individual planning to buy stocker calves might do this or an individual or feedlot planning to acquire cattle in the future. The futures price or call option strike price would need to be adjusted by the basis to know the approximate purchase price (in the case of futures) or ceiling price (in the case of options) being set. 6

7 Example 3: To lock in a purchase price in October for lbs steers to be purchased in April April feeder cattle futures Estimated basis Expected hedged price in April $ (from page 10) $ If Futures Increase Date Cash Futures Basis October Expected hedged price in April $ Buy April futures $ $33.75 April Buy cattle $ Sell April futures $ $33.75 Actual cost of cattle Buy cattle $ Futures profit Actual cost $ Futures profit $ 5.00 If Futures Decrease Date Cash Futures Basis October Expected hedged price in April $ Buy April futures $ $33.75 April Buy cattle $ Sell April futures $ $33.75 Actual cost of cattle Buy cattle $ Futures profit Actual cost $ Futures loss $

8 Example 4: Use of a call option in October to set a ceiling price on a planned purchase of 450 lbs steers in April using a $135 strike price and a premium cost of $2/cwt. Buy April $135 Call Option Basis Premium Ceiling price $ (from page 10) $ If Futures Increase Date Cash Futures Basis October Ceiling price $ Buy April $135 Call Option $2.00 +$33.75 Sell April $135 April Buy cattle $ Call Option (April $5.00 +$33.75 futures $140) Actual cost of cattle Buy cattle $ Futures profit Actual cost Option profit $ 3.00 $ If Futures Decrease Date Cash Futures Basis October Ceiling price $ Buy April $135 Call Option $2.00 +$33.75 Call option expires April Buy cattle $ worthless (April +$33.75 Futures $130) Actual cost of cattle Buy cattle $ Plus call premium Actual cost $ Option loss $ 2.00 (cost of option) 8

9 Use of Basis in Forward Contracting Feeder cattle basis estimates are also used in forward cash contracts with a cattle buyer to buy feeder cattle. Buyers will look at the futures price when the cattle will be delivered and adjust that price using historical basis information. They may also deduct an additional amount for costs associated with their use of the futures market, which protects them should the cattle market decline. In the fed cattle business, most packers offer cattle feeders the opportunity to price cattle in advance of delivery using either a fixed price or basis contract. The fixed price contract is typically even with $2 per cwt under the futures price for the particular month of delivery. The futures price is usually the same as the cattle delivery month or the month following the month of delivery. The futures price is discounted by the basis. That basis is taken from the historical basis adjusted for the particular set of cattle being contracted. A set of desirable cattle likely to grade a high percent Choice of Yield grade 1, 2 or 3 would have a smaller discount to the futures or perhaps no discount at all. A less desirable set of cattle would have a larger (more negative) basis and consequently a lower contract price. A review of historical basis would help the cattle feeder to know whether the basis being offered was reasonable. If they believed it was too wide (negative) they could hedge the cattle directly on the futures market and hope to have a smaller basis. Basis contracts offered by packers result in a commitment for the packer to buy the cattle at a certain basis. That basis would again reflect the historical basis and that particular set of cattle (quality). The seller would then have a period of time to set the price. That price would depend on the futures price for the month specified in the contract. Again, the seller could use historical basis data to decide if the basis offered by the packer is reasonable. Some forward price contracts and basis contracts have specifications requiring that the cattle grade a certain percentage Choice with limits on the yield grade and carcass weights. 9

10 BASIS Tennessee Feeder Cattle: M-1 Steers lbs. Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Futures Price Tennessee Cash Price Tennessee Cash vs. Futures Avg Sources: USDA/Tennessee Department of Agriculture Market News Service and Livestock Marketing Information Center 10

11 BASIS Tennessee Feeder Cattle: M-1 Steers lbs. Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Futures Price Tennessee Cash Price Tennessee Cash vs. Futures Avg Sources: USDA/Tennessee Department of Agriculture Market News Service and Livestock Marketing Information Center 11

12 BASIS Tennessee Feeder Cattle: M-1 Steers lbs. Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Futures Price Tennessee Cash Price Tennessee Cash vs. Futures Avg Sources: USDA/Tennessee Department of Agriculture Market News Service and Livestock Marketing Information Center 12

13 BASIS Tennessee Feeder Cattle: M-1 Steers lbs. Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Futures Price Tennessee Cash Price Tennessee Cash vs. Futures Avg Sources: USDA/Tennessee Department of Agriculture Market News Service and Livestock Marketing Information Center 13

14 BASIS Tennessee Feeder Cattle: M-1 Heifers lbs. Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Futures Price Tennessee Cash Price Tennessee Cash vs. Futures Avg Sources: USDA/Tennessee Department of Agriculture Market News Service and Livestock Marketing Information Center 14

15 BASIS Tennessee Feeder Cattle: M-1 Heifers lbs. Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Futures Price Tennessee Cash Price Tennessee Cash vs. Futures Avg Sources: USDA/Tennessee Department of Agriculture Market News Service and Livestock Marketing Information Center 15

16 BASIS Tennessee Feeder Cattle: M-1 Heifers lbs. Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Futures Price Tennessee Cash Price Tennessee Cash vs. Futures Avg Sources: USDA/Tennessee Department of Agriculture Market News Service and Livestock Marketing Information Center 16

17 BASIS Tennessee Feeder Cattle: M-1 Heifers lbs. Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Futures Price Tennessee Cash Price Tennessee Cash vs. Futures Avg Sources: USDA/Tennessee Department of Agriculture Market News Service and Livestock Marketing Information Center 17

18 Average Basis for Load Lots - Steers Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual** $/cwt * Average Basis for Load Lots - Heifers Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual** $/cwt * * * Very few feeder heifers are sold weighing over 850 pounds or steers weighing over 1000 pounds. ** Annual average may be different due to including additional loads not represented in the monthly average. Due to monthly average, must include at least two loads to be presented. 18

19 BASIS CALCULATIONS BETWEEN SLAUGHTER CATTLE FUTURES AND SPECIFIED STEER CASH MARKETS a 12/13/17 ($ Per CWT) Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Cattle Futures b Texas-Oklahoma Cash Texas-Oklahoma Basis Avg Iowa-Minn Cash Iowa-Minn Basis Avg Colorado Cash Colorado Basis Avg Livestock Marketing Information Center Page 1 of 2 19

20 BASIS CALCULATIONS BETWEEN SLAUGHTER CATTLE FUTURES AND SPECIFIED STEER CASH MARKETS a 12/13/17 ($ Per CWT) Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Cattle Futures b Kansas Cash Kansas Basis Avg Nebraska Cash Nebraska Basis Avg a Monthly weighted average live slaughter steer total price b Average of daily close of nearby futures contract (using Feb, Apr, Jun, Aug, Oct & Dec contracts) Source: AMS reports and CME futures prices Livestock Marketing Information Center Page 2 of 2 20

21 AVERAGE BASIS FED STEERS a Live, Kansas, Weekly 01/22/ February April Week Avg. Std Week Avg. Std Week Ending Dev Ending Dev 14 11/25/ /28/ /02/ /04/ /09/ /11/ /16/ /18/ /23/ /25/ /30/ /04/ /06/ /11/ /13/ /18/ /20/ /25/ /27/ /01/ /03/ /08/ /10/ /15/ /17/ /22/ /24/ /29/ June August Week Avg. Std Week Avg. Std Week Ending Dev Ending Dev 14 04/01/ /27/ /08/ /03/ /15/ /10/ /22/ /17/ /29/ /24/ /06/ /01/ /13/ /08/ /20/ /15/ /27/ /22/ /03/ /29/ /10/ /05/ /17/ /12/ /24/ /19/ /01/ /26/ October December Week Avg. Std Week Avg. Std Week Ending Dev Ending Dev 14 07/29/ /30/ /05/ /07/ /12/ /14/ /19/ /21/ /26/ /28/ /02/ /04/ /09/ /11/ /16/ /18/ /23/ /25/ /30/ /02/ /07/ /09/ /14/ /16/ /21/ /23/ /28/ /30/ a Through the last full week of trading of the Chicago Mercantile Exchange's Live Cattle Contract. Weekly weighted average live slaughter steer price Livestock Marketing Information Center 21

22 BASIS CALCULATIONS BETWEEN SLAUGHTER CATTLE FUTURES AND SPECIFIED HEIFER CASH MARKETS a 12/13/17 ($ Per CWT) Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Cattle Futures b Texas-Oklahoma Cash Texas-Oklahoma Basis Avg Iowa-Minn Cash Iowa-Minn Basis Avg Colorado Cash Colorado Basis Avg Livestock Marketing Information Center Page 1 of 2 22

23 BASIS CALCULATIONS BETWEEN SLAUGHTER CATTLE FUTURES AND SPECIFIED HEIFER CASH MARKETS a 12/13/17 ($ Per CWT) Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Cattle Futures b Kansas Cash Kansas Basis Avg Nebraska Cash Nebraska Basis Avg a Monthly weighted average live slaughter heifer (35-65% choice) b Average of daily close of nearby futures contract (using Feb, Apr, Jun, Aug, Oct & Dec contracts) Source: AMS reports and CME futures prices Livestock Marketing Information Center Page 2 of 2 23

24 AVERAGE BASIS FED HEIFERS a Live, Kansas, Weekly 01/22/ February April Week Avg. Std Week Avg. Std Week Ending Dev Ending Dev 14 11/25/ /28/ /02/ /04/ /09/ /11/ /16/ /18/ /23/ /25/ /30/ /04/ /06/ /11/ /13/ /18/ /20/ /25/ /27/ /01/ /03/ /08/ /10/ /15/ /17/ /22/ /24/ /29/ June August Week Avg. Std Week Avg. Std Week Ending Dev Ending Dev 14 04/01/ /27/ /08/ /03/ /15/ /10/ /22/ /17/ /29/ /24/ /06/ /01/ /13/ /08/ /20/ /15/ /27/ /22/ /03/ /29/ /10/ /05/ /17/ /12/ /24/ /19/ /01/ /26/ October December Week Avg. Std Week Avg. Std Week Ending Dev Ending Dev 14 07/29/ /30/ /05/ /07/ /12/ /14/ /19/ /21/ /26/ /28/ /02/ /04/ /09/ /11/ /16/ /18/ /23/ /25/ /30/ /02/ /07/ /09/ /14/ /16/ /21/ /23/ /28/ /30/ a Through the last full week of trading of the Chicago Mercantile Exchange's Live Cattle Contract. Weekly weighted average live slaughter heifer price Livestock Marketing Information Center 24

25 AG.TENNESSEE.EDU D 34 02/18 Programs in agriculture and natural resources, 4-H youth development, family and consumer sciences, and resource development. University of Tennessee Institute of Agriculture, U.S. Department of Agriculture and county governments cooperating. UT Extension provides equal opportunities in programs and employment.